Vested benefits accounts and deposits: can they be kept beyond the legal retirement age?

There is some legal uncertainty over whether a vested benefits account or deposit can be retained once the legal retirement age is reached.

The question is not trivial, because vested assets are not subject to either capital income or wealth tax. The person who does not need cash in the near future will therefore have every interest in keeping it within this pension envelope for as long as possible.

The law and ordinances governing occupational pensions (LPP – pension fund), as well as in matters of 3rd pillar a), authorize the maintenance of coverage for a maximum of 5 years after the ordinary retirement age provided that there is continuation of a lucrative activity subject to AVS contributions.

Nothing of the sort is indicated for free passage. Article 16 of the Free Passage Ordinance clearly states that it is possible to defer payment no later than 5 years after the AVS retirement age, without linking this to the pursuit of gainful activity.

On the other hand, on the side of the cantonal tax administrations the story is different. With 26 cantons and therefore 26 different tax practices, interpretations can diverge, especially if it appears that maintaining free passage has no other aim than to save taxes.

For the cantonal tax authorities, article 16 of the ordinance on vested benefits is considered an "anomaly", which will certainly be corrected in the future to align all forms of pension savings with the practice in force for the LPP and 3a accounts (see 3rd §).

  As it stands, this is what emerges from the Vaud and Geneva tax authorities:  

1.  If free passage was opened before age 64/65 and kept in compliance with the law, the tax authorities tolerate its maintenance until 5 years after the ordinary retirement age. As an example, we can cite the following cases: a person stopped at age 56, opened a free passage and no longer worked. Or, a person changes jobs, has free passage that he cannot transfer to his new employer's fund due to overinsurance. Or, a person leaves freely after the age of 58, pursues an activity without LPP (independent) or registers as unemployed. These cases are called "legal" and can therefore be maintained for 5 years beyond the legal retirement age.
     
2.  In the event that free passage has not been preserved in compliance with the laws (for example because he was not transferred to the fund of his new employer, whereas he should have been according to article 4 LFLP), the tax authorities will consider that the vested benefits expired at the same time as old age benefits from the pension fund. Given that the tax authorities do not have visibility on the existence of vested benefits accounts, since pension assets are not reported in the tax declaration, it is only at the time of the exit of the assets from the vested benefits foundation that the tax authorities will be aware of the latter, also proceeding with the transition to separate taxation of assets, at a rate that can range from 5 to 25% depending on the cantons.

Possible consequences will include:

• Possible catch-up on wealth tax and any related income (with up to 5 years of retroactivity in the case of leaving free passage at age 69/70),
• Adjustment of the pension capital exit tax based on the accumulation of the two capital benefits for the calculation of the rate, in the case where all or part of the pension assets from the pension fund of the employer had been taken as capital.

In any case, it seems appropriate to us to always consult a specialist to avoid any pitfalls when requesting payment of the vested benefits. Impact Financial Engineering SA will be able to advise you usefully and completely independently on the possibilities offered to you, in compliance with current laws and tax practices.

Reform of Swiss inheritance law: entry into force on January 1, 2023

In our January 2021 edition, we informed you of the reform project currently being adopted in the Federal Chambers.

This reform, which tends to improve the testator's room for maneuver, will come into force on January 1, 2023.

Impact Financial Engineering is at your disposal for any questions you may have.

With our warmest greetings.